Principal Issues: 1. What is the relevant moment for assessing the non-arm’s length relationship, for the purpose of the ACB reduction in 84.1(2)(a.1)(ii) I.T.A.? 2. Whether the reduction applies when the capital gains deduction was claimed by a person who was, at the time of the prior disposition, not dealing at arm’s length but who is now dealing at arm’s length? 3. Whether the reduction applies when the capital gains deduction was previously claimed by a non-arm's length person but the shares were subsequently held by an arm's length person
Position: 1. The relevant moments for the non-arm's length determination are the time of acquisition by the taxpayer and the time of a prior disposition for which the capital gains deduction was claimed; 2. The fact that the parties are now dealing at arm’s length is not relevant; 3. The prior claim of the capital gains deduction will not reduce the ACB, provided the shares were acquired by the taxpayer from a person dealing at arm’s length and the intermediate detention by the third party was bona fide.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
12. Section 84.1 of the Regulations
Situation 1
Paragraph 84.1(2)(a.1) provides that the ACB is reduced if a CGD has been utilized by a non-arm's length person.
In 2020, Mr. X married the daughter of Mr. Y (Mr. X became Mr. Y's son-in-law).
In 2020, Mr. X acquired shares of the capital stock of PME Inc. from Mr. Y, who claimed the CGD.
In 2022, Mr. X ceased to be related to Mr. Y by virtue of the death of his spouse or the rupture of their marriage.
Questions to CRA
(a) If in 2024, Mr. X transferred his shares of PME Inc. on a section 85 rollover basis to his holding company, would section 84.1 reduce the ACB of his shares of the capital stock of PME Inc.?
(b) Is the determination of the non-arm’s length relationship under section 84.1 to be made at the time of the purchase (in 2020) or at the time that section 84.1 is engaged (in the rollover transaction)?
CRA Response to the questions in Situation 1
Paragraph 84.1(2)(a.1) may apply if a share was acquired by a taxpayer from a person with whom the taxpayer was not dealing at arm's length. The time for determining a non-arm's length relationship referred to in that paragraph is the time at which the shares were acquired by the taxpayer.
If the taxpayer was not dealing at arm's length at that time, subparagraph 84.1(2)(a.1)(ii) could have the effect of reducing the ACB of the shares to the taxpayer, for the purposes of applying section 84.1 to any subsequent disposition. That reduction will occur to the extent that the CGD was claimed in respect of a previous disposition of the share or of a share for which the share was substituted, where such CGD was claimed by the taxpayer or an individual with whom the taxpayer did not deal at arm's length. According to the CRA's longstanding position, the relationship between the parties must be assessed at the time section 110.6 is to be applied.
At the time Mr. X acquired the shares of the capital stock of PME Inc., there was a non-arm's length relationship between Mr. X and Mr. Y, and the CGD was claimed by Mr. Y in respect of that disposition. There was therefore a non-arm's length relationship both at the time referred to in paragraph 84.1(2)(a.1) and at the time referred to in subparagraph 84.1(2)(a.1)(ii). Consequently, for the purposes of applying section 84.1 to the sale to his holding company, the ACB of the shares of the capital stock of PME Inc. held by Mr. X must be reduced by the CGD claimed by Mr. Y.
Situation 2
Mr. X sold his shares to a third party (Mr. C) and he claimed the CGD.
Later, Mr. X's daughter purchased the same shares, but held by Mr. C.
Question to the CRA
Does paragraph 84.1(2)(a.1) have the effect of reducing, for the purposes of section 84.1, the ACB to Mr. X's daughter of her shares of the capital stock of PME Inc. by reason of the CGD claimed by her father on the sale to Mr. C?
CRA Response to Situation 2
We have assumed that Scenario 2 is completely independent of Scenario 1 above and that Mr. X's daughter deals at arm's length with Mr. C. Finally, we have assumed that these transactions were not contemplated in advance and that Mr. C acquired the shares as a bona fide investment.
Insofar as Mr. X's daughter purchased the shares from a person with whom she was dealing at arm's length and under the above assumptions, we are of the view that the ACB of those shares should not be reduced by paragraph 84.1(2)(a.1), for the purposes of section 84.1.
Simon Lemieux
October 10, 2024
2024-102893